Unintended consequences of monetary inflation

By Alasdair Macleod

“In short, the Fed is committed to rescue businesses from the greatest economic catastrophe since the great depression and probably even greater than that, to fund the US Government’s rocketing budget deficits, fund the maintenance of domestic consumption directly or indirectly through the US Treasury, while pumping up financial markets to achieve these objectives and preserve the illusion of national wealth.

“Clearly, we stand on the threshold of an unprecedented monetary expansion.”

President Reagan memorably said that the nine words you don’t want to hear are “I’m from the government and I’m here to help.” Governments in all the major jurisdictions are now making good on that unwanted promise and are taking responsibility for everything from our shoulders.

Those receiving subsidies and loan guarantees are no doubt grateful, though they probably see it as the government’s duty and their right. But someone has to pay for it. In the past, by the redistribution of wealth through taxes it meant that the haves were taxed to give financial support to the have-nots, at least that was the story. Today, through monetary debasement nearly everyone benefits from monetary redistribution.

This is not a costless exercise. Governments are no longer robbing Peter to pay Paul, they are robbing Peter to pay Peter as well. You would think this is widely understood, but the Peters are so distracted by the apparent benefits they might or might not get that they don’t see the cost. They fail to appreciate that printing money is not just the marginal source of finance for excess government spending, but it has now become mainstream.

There is almost a total absence in the established media of any commentary on the consequences of monetary inflation, and in a cry for more we even have financial experts warning us of a deflationary collapse and the need for the Fed to introduce negative interest rates to stave off deflation.

Yes, there are deflationary forces, because banks wish to reduce their loan exposure at a time of increasing risk. But we can be sure central banks and their political masters will do everything they can to counter the trend of contracting bank credit by increasing base money. There can only be one outcome: the debasement and eventual destruction of fiat currencies.

It was the nineteenth century French economist, Frederic Bastiat, who pointed out there were unseen consequences from violating property. He took the biblical approach of a parable, famous as the broken window fallacy.

It is not what is seen, but what is unseen. He told of a boy breaking a window, its destruction giving business to the glazier which he would not otherwise have had. That is seen; unseen is the constructive spending that otherwise would have occurred if the cost of the broken window had not been incurred.

We see the helicoptered money, the furlough support, and the businesses helped not to go bust. But we do not see the cost. We don’t see how the resources taken up might otherwise be constructively deployed. We are told that the government is paying for it all, but taxes are not being raised.

Was Reagan’s aphorism wrong after all? If so, the government employee on our doorstep with his offer of help is to be welcomed. He comes bearing gifts. And without an increase in taxes what is not to like?

Bastiat gave us the answer. Unfortunately, the unseen consequences of apparently costless inflationary financing are myriad, as we will painfully discover.

The Cantillon effect
Over a century before Bastiat, an Irish banker in France, Richard Cantillon, observed that new money drove up prices as it was spent. He had experienced John Law’s Mississippi bubble, which was fueled by printed money and the issuance of bank credit, so Cantillon had observed the effect.

It made well-connected speculators their fortunes, whose profligate spending drove up prices for everyone else. The effect at that time was that in real terms insiders became rich and the poor got poorer. To this day the process by which this happens is known as the Cantillon effect.

Now that it is official policy, the lesson for today is that a rapid increase in monetary inflation will, as the effects trickle through the economy, further impoverish the poor. It will do this by driving up prices of their essentials and reducing the purchasing power of their salaries, if they are lucky enough to still be employed.

But as Cantillon pointed out in his Essai, reflecting the increased quantity of circulating money prices rise unevenly. Never has it been truer than today, when we face the combination of an unprecedented slump in economic activity combined with a sharp escalation in monetary inflation: the rich whose stocks are rising can buy their expensive toys at knockdown prices, while the poor, increasing numbers of which are newly unemployed, struggle to make ends meet with rising prices for life’s essentials.

It gets worse. Just as in Cantillon’s day, modern monetary policy is aimed at maintaining and increasing financial asset values. John Law’s puffery attempted to inflate the combination of his Banque Royale and his Mississippi ventures. Today it is all government bond markets, corporate debt, and stocks and shares.

The intention is to maintain and further a wealth effect to replace the true wealth that has been lost, originally accumulated by entrepreneurs and businessman serving the consumer successfully. All we have now is John Law-style puffery.

The enrichment of the few at the expense of the many is a finite process. The outcome will inevitably be the same: Law’s scheme began to run into headwinds in December 1719, and by the following September his unbacked currency had failed. It was dead, worthless, an ex-currency.

The empirical evidence is clear. Central banks emulating Law’s scheme today will destroy their currencies and everything that floats on their seas of paper credit and debt. The rapidity of the collapse of the Mississippi scheme strongly suggests that once control over bond prices is lost the contemporary financial and monetary collapse will be similarly swift.

For this reason, understanding the consequences of monetary inflation spiralling out of control has never been more important. We should know what they are from a study of sound economic theory and empirical evidence.

The poor will starve and many of those who became rich through financial asset inflation will eventually join them. For the latter class, there will come a point where they abandon a failing dollar-based inflation scheme to save what they can from the financial wreckage.

Distortions and misallocations of capital
There is an aspect of the destruction brought about by monetary policy, which is almost never considered by policy makers, and that is how it distorts the allocation of capital and leads to its misallocation. In free markets, capital is scarce and must be used to greatest effect if the consumer is to be properly served and the entrepreneur is to maximise his profits.

Capital comes in several forms and encompasses every aspect of production; principally an establishment, machinery, labour, semi-manufactured goods and commodities to be processed, and money. An establishment, such as a factory or offices, and the availability of labour are relatively fixed in their capacity.

Depending on their deployment and capacity they produce a limited amount of goods. It is just the one form of capital, that is money and credit, which central banks and the banking system now provide, and which in its unbacked form is infinitely flexible. Consequently, attempts to stimulate production by monetary means run into the capacity constraints of the other forms of capital.

Monetary policy has been increasingly used to manipulate capital allocation since the early days of the great depression in the 1930s. The effect has varied but it has generally come up against the constraints of the other forms of capital. Where there is excess labour, it takes time to retrain it with the specialist skills required, a process hampered by trade unions ostensibly protecting their members, but in reality, resisting reallocation of labour resources.

Government control over planning and increasingly stifling regulations, again putting a brake on change, meant that changes and additions to the use of establishments lengthen the time before entrepreneurial investment was rewarded with profits. Government intervention has also discouraged the withdrawal of monetary capital from unprofitable deployment, or malinvestments, lengthening recessions needlessly.

When the advanced nations had strong industrial cores, the periodic expansions of credit and their subsequent sudden contractions led to observable booms and busts in the classical sense, since production of labour-intensive consumer goods dominated production overall.

There were then two further developments. The first was the abandonment of the Bretton Woods agreement in 1971, which led to a substantial rise in prices for commodities. According to the broad-based UN index of commodities rose from 33 to 157 during the decade, a rise of 376%.[i]

This input category of production capital compared unfavourably with US consumer price increases over the decade of 112%, the mismatch between these and other categories of capital allocation making economic calculation a fruitless exercise. The second development was the liberation of financial controls in the mid-eighties, London’s big-bang and the repeal of America’s Glass Steagall Act of 1933, allowing commercial banks to fully embrace and exploit investment banking activities.

The banking cartel increasingly directed its ability to create credit towards purely financial activities mainly for their own books, thereby financing financial speculation, while de-emphasising bank credit expansion for production purposes for all but the larger corporations. Partly in response, the nineties saw businesses move production to low-cost centres in South-East Asia where all forms of production capital, with the exception of monetary capital, were significantly cheaper and more flexible.

There then commenced a quarter-century of expansion of international trade replacing much of the domestic production of goods in the US, the UK, and Europe. It was these events that denuded America of its manufacturing, not unfair competition as President Trump has alleged and Germany’s retention of manufactures proves. But the effect has been to radically alter how we should interpret the effects of monetary expansion on the US economy and others, compared with Hayekian triangles and the like.

Business cycle research had assumed a capitalistic structure of savers saving and thereby making monetary capital available to entrepreneurs. Changes in the propensity to save sent contrary signals to businesses about the propensity to consume, which caused them to alter their production plans. Based on the ratio between consumer spending and savings, this analytic model has been corrupted by the state and its licensed banks by replacing savers with former savers now no longer saving, and even borrowing to consume.

Today, the inflationary origins of investment funds for business development are hidden through financial intermediation by venture capital funds, quasi-government funds and others. Being mandatory, pension funds continue to invest savings, but their beneficiaries have abandoned voluntary saving and run up debts, so even pension funds are not entirely free of monetary inflation. Insurance funds alone appear to be comprised of genuine savings within an inflationary system.

Other than pension funds and insurance companies, Keynes’s wish for the euthanasia of the saver has been achieved. He went on to suggest there would be a time “when we might aim in practice… at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus…”[ii]

Now that everywhere bank deposits pay no interest, his wish has been granted, but Keynes did not foresee the unintended consequences of his inflationist policies which are now being visited upon us. Among other errors, he failed to adequately account for the limitation of non-monetary forms of capital, which leads to bottlenecks and rising prices as monetary expansion proceeds.

The unintended consequences of neo-Keynesian policy failures are shortly to be exposed. The checks and balances on the formation and deployment of monetary capital in the free market system based on the division of labour have been completely destroyed and replaced by inflation. So, where do you take us from here, Mr Powell, Mr Bailey, Ms Lagarde, Mr Kuroda?

Taking stock

We can now say that America, the nation responsible for the world’s reserve currency, has encouraged policies which have turned its economy from being a producer of goods with supporting services as the source of its citizens’ wealth into little more than a financial casino.

The virtues of saving and thrift have been replaced by profligate spending funded by debt. Unprofitable businesses are being supported until the hoped-for return of easier times, which are now gone.

Cash and bank deposits (checking accounts and savings deposits) are created almost entirely by inflation, and currently total $15.2 trillion in the US, while total commercial bank capital is a little under $2 trillion. This tells us crudely that $13 trillion sitting in customer accounts can be attributed to bank credit inflation. Increasing proportions of those customers are financial corporations and foreign entities, and not consumers maintaining cash and savings balances.

On the other side of bank balance sheets is consumer debt, mostly off-balance sheet, but ultimately funded on-balance sheet. Excluding mortgages, the total comprised of credit cards, autos and student debt was $3.86 trillion in mid-2019, amounting to an average debt of $27,571 per household, confirming the extent to which consumer debt has replaced savings.[iii]

At $20.5 trillion, bank balance sheets are far larger than just the sum of cash and bank deposits, giving them a leverage of over ten times their equity. Bankers will be very nervous of the current economic situation, aware that loan and other losses of only ten per cent wipes out their capital. Meanwhile, their corporate customers are either shut down, which means most of their expenses continue while they have no income, or they are suffering payment disruptions in their supply chains.

In short, bank loan books are staring at disaster. Effectively, the whole banking system is underwater at the same time as the Fed is extolling them to join with it in rescuing the economy by expanding their balance sheets even more.

The sums involved in supply chains are considerably larger than the US’s GDP. Onshore, it is a substantial part of the nation’s gross output, which captures supply chain payments at roughly $38 trillion. Overseas, there is a further mammoth figure feeding into the dollar supply chain, taking the total for America to perhaps $50 trillion.

The Fed is backstopping the foreign element through currency swaps and the domestic element mainly through the commercial banking system. And it is indirectly funding government attempts to support consumers who are in the hole for that $27,571 on average per household.

In short, the Fed is committed to rescue all business from the greatest economic collapse since the great depression, and probably greater than that, to fund the US Government’s rocketing budget deficits, fund the maintenance of domestic consumption directly or indirectly through the US Treasury, while pumping financial markets to achieve these objectives and preserve the illusion of national wealth.

Clearly, we stand on the threshold of an unprecedented monetary expansion. Part of it will be, John Law style, to ensure inflated prices for US Treasuries are maintained. At current interest rates debt servicing was already costing the US Government 40% of what was expected to be this year’s government deficit.

That bill will now rise beyond control even without bond yields rising. Assistance is also being provided to the corporate debt market. Blackrock has been deputed to channel the Fed’s money-printed investment through ETFs specialising in this market. So not only is the Fed underwriting the rapidly expanding US Treasury market, but it is underwriting commercial dollar debt as well.

In late-1929, a rally in the stock market was prolonged by a similar stimulus, with banks committed to buying stocks and the Fed injecting $100m liquidity into markets by buying government securities. Interest rates were cut. And when these attempts at maintaining asset prices failed, the Dow declined, losing 89% of its value from September 1929.

Today, similar attempts to rescue economies and financial markets by monetary expansion are common to all major central banks, with the possible exception of the ECB, which faces the unexpected obstacle of a challenge by the German Constitutional Court claiming primacy in these matters.

There is therefore an added risk that the global inflation scheme will unravel in Europe, which if it does will rapidly lead to funding and banking crises for the spendthrift member states. Doubtless, any financial contagion will require yet more money-printing by the other major central banks to ensure there are no bank failures in their domains.

Whither the exit?

So far, few commentators have grasped the implications of what amounts to the total nationalisation of the American economy by monetary means. They have only witnessed the start of it, with the Fed’s balance sheet reflecting the earliest stages of the new inflation which has seen its balance sheet increase by 61% so far this year. Not only will the Fed battle to fund everything, but it will also have to compensate for contracting bank credit, which we know stands at about $18 trillion.

The Fed must be assuming the banks will cooperate and pass on the required liquidity to save the economy. Besides the monetary and operational hurdles such a policy faces, it cannot expect the banks will want responsibility for the management of businesses that without this funding would not exist.

The Fed, or some other government agency has to then decide one of three broad options: further support, withdrawing support, or taking responsibility for business activities. This last option involves full nationalisation.

We must not be seduced into thinking this is an outcome that can work. The nationalisation of failing banks and their eventual privatisation is not a good precedent for wider nationalisation, because a bank does not require the entrepreneurial flair to estimate future consumer demand and to undertake the economic calculations to provide for it. The state taking over business activities fails for this reason, demonstrated by the collapse of totalitarian states such as the USSR and the China of Mao Zedong.

That leaves a stark choice between indefinite monetary support or pulling the rug from under failing businesses. There are no prizes for guessing that pulling rugs will be strongly resisted. Therefore, government support for failing businesses is set to continue indefinitely.

At some stage, the dawning realisation that central banks and their governments are steering into this economic cul-de-sac will undermine government bond yields, despite attempts by central banks to stop it, even if the deteriorating outlook for fiat currencies’ purchasing power does not destroy government finances first.

Earlier in the descent into the socialisation of money, nations had opportunities to change course. Unfortunately, they had neither the knowledge nor the guts to divine and implement a return to free markets and sound money. Those opportunities no longer exist and there can be only one outcome: the total destruction of fiat currencies accompanied by all the hardships that go with it.

[i] Bank of England Quarterly Bulletin March 1981[ii] Concluding notes, General Theory. JM Keynes[iii] See Debt.org


China plans to crush new covid outbreaks with tough measures

They may work, but the cost will be high

CHINA’S MOST frightening outbreak of covid-19 lurks in Harbin, a north-eastern city known for Russian architecture and a winter festival featuring large castles hewn from river ice.

Traced to a Chinese student who flew from America in March, the outbreak has pushed the city of 10m back into semi-lockdown, weeks after a first wave of the virus was defeated in Wuhan, far to the south.

The Chinese authorities are deeply alarmed by imported cases. The country’s borders are closed to almost all foreigners and only about 20 international flights land in all of China each day. Domestically, however, travel bans are being lifted, and businesses and schools urged to resume work. Not in Harbin. Travellers reaching the city from abroad must spend 14 days in government-arranged quarantine, then another 14 in isolation at home.

School reopenings have been postponed. A single case in a housing compound condemns every resident there to a fortnight’s quarantine. When those unfortunate neighbours emerge from isolation they may not leave Harbin. That ban is enforced via smartphone apps that must be shown by all domestic travellers.

The world is familiar by now with China’s approach to virus control, combining brute force (breaking transmission chains by preventing Chinese people from meeting others, if needs be for weeks) with high-tech surveillance and contact tracing.

The Harbin lockdown is revealing because it was triggered by such a small cluster. At the time of writing, the city has just 63 confirmed cases of covid-19, plus another 17 asymptomatic cases.

Compare Harbin with another chilly, northern city with 63 confirmed cases: Fairbanks, Alaska. Though Alaska has a far higher rate of infections per person than China—Fairbanks is home to just 31,500 people—the state began reopening on April 23rd. Alaska’s Republican governor, Mike Dunleavy, told citizens to incorporate the virus into daily life, saying: “There will be deaths, as there have been with car accidents and cancers and strokes.”

In rich countries, politicians and scientists are weighing the economic and social costs of lockdowns. It is increasingly common to hear calls to shelter the old and infirm while letting healthy folk take their chances.

The aim is to restart the economy while keeping the current pace of covid infections—the effective reproduction number, or Rt—below a replacement rate of one-for-one, so that cases decline over time and never overwhelm health systems.

China is taking a different path. Alone among large countries with many land neighbours, it wants an Rt as close to zero as possible, and will endure pain to achieve that. To date, the world shows little interest in debating the wisdom or folly of that strategy. One cause may be suspicion of China’s numbers.

Western politicians call it naive to believe that China has suffered only 84,000 cases to date, and 4,600 deaths. This when Belgium, a country only a bit more populous than Harbin, has reported 7,200 covid deaths.

True, some official claims are risible, such as a boast in March that the 2m-strong People’s Liberation Army had no virus cases. Nor have any senior officials admitted to being infected, which seems odd. Other numbers are surely undercounts.

A new paper in the Journal of Medical Virology, by Yong Feng and others, examines serological tests conducted on 1,402 people at a single hospital in Wuhan in April, after the epidemic’s peak. Most were locals needing test certificates to return to work.

Overall, one-tenth tested positive for covid antibodies. Wuhan’s population is 11m. Even allowing for false positives and a sample skewed by the inclusion of almost 400 hospital patients, very large numbers were clearly infected at some point, many without knowing it. Yet a more basic claim—that China is currently free of large, uncontrolled outbreaks—is credible.

In Wuhan’s worst weeks, smartphone videos of overwhelmed hospitals were seen by millions of social-media users, before censors deleted them. If a city were in such agonies now, it would leak. China has achieved something worth debating.

The Communist Party is a black box. But some incentives that guide its leaders are knowable.

For one thing, maintaining order and keeping people safe is the foundation of the social contract between rulers and the masses. That compact wins public support for a fair amount of sacrifice. Should economic woes endure, the party will stoke nationalism, with even more propaganda reports about incompetence and chaos in the democratic West.

For another thing, covid-19’s first wave almost broke China’s underfunded health system. A paper examining China’s virus response, co-authored by Ruoran Li of Harvard University, finds that any city suffering a Wuhan-like outbreak will need 2.6 intensive-care beds per 10,000 adults. Nationally, China has only about 0.3 such beds per 10,000 people (America has ten times as many).

Forget flattening the curve, China wants no curve

Another sobering conclusion is drawn by Qifang Bi and others from the Johns Hopkins Bloomberg School of Public Health, writing in Lancet Infectious Diseases. They examine how the large, affluent southern city of Shenzhen traced and isolated contacts of early virus cases. The clever sleuthing worked.

But questions about asymptomatic cases missed by surveillance “temper any hopes of stopping the covid-19 pandemic” by tracing and isolation alone, they conclude. Put another way, China may feel obliged to keep imposing lockdowns and border controls for a long time, despite the costs.

Whether Chinese rulers come to regret that trade-off may depend on whether an effective vaccine is found soon, says Benjamin Cowling, head of epidemiology at Hong Kong University.

If they can protect people’s health and get a vaccine by the end of the year, then China will look extremely smart,” he argues.

Should others open up, China will look more and more unusual: a giant economy repeatedly slamming on the brakes to smother even small clusters. If effective vaccines or treatments fail to emerge, that cannot be sustainable for ever. Born out of caution, China’s virus exceptionalism is a gigantic gamble.

Washington’s East of Suez Moment

By: Caroline D. Rose

In January 1968, British Prime Minister Harold Wilson delivered an address to the House of Commons in which he formally announced that the United Kingdom would finally withdraw its military from locations east of the Suez Canal, namely Singapore and Malaysia and, within three years, the Persian Gulf.

It was a question London had grappled with since 1956, when currency devaluation, high-interest postwar debt, anti-colonialism sentiment and diminished imperial influence forced the government to reevaluate its defense posture. The “East of Suez” moment brought an end to one of the world’s longest-reigning imperial powers.

Just over 50 years later, the United States is facing a similar moment, not in the form of a waning empire but amid a viral pandemic. The differences are apparent, of course: The U.S. is still the world’s strongest military power, still boasts the largest defense budget on the planet and still maintains a large military footprint throughout the world.

And though it has its share of economic issues, it is not in the throes of a currency crisis, nor are any of its problems uniquely American, thanks to the coronavirus, which is raising unemployment and slowing economic growth across the world.

In fact, the pandemic may have given policymakers in Washington an opportunity to accelerate the reduction of forces in the Middle East and thus change its regional defense posture in the long term, something it has tried but failed to do for the better part of a decade. Yet, within a span of three months, U.S. personnel have begun to pack up from a number of bases across the Levant, signaling Washington may seriously be beginning the process of withdrawal.

And though this will not mark the end of U.S. imperial power as it did for the U.K. in 1968, it will mark the end of an era in which Washington dominated the Middle East directly through the use of military force.

With disengagement comes a reconfiguration of Middle Eastern geopolitics, creating opportunities for regional, self-reliant powers to consolidate influence and advance defensive interests.

A Pattern Emerges

The forever wars the U.S. has carried out for the past two decades have been the defining characteristic of the post-9/11 era. What started as a response to terrorist attacks became a permanent presence. Mission creep became the norm. Operations in Iraq, Afghanistan and later Syria shifted objectives and sunk into long-term, seemingly indefinite commitments.

Getting into Middle Eastern wars is easier than getting out – just ask the Brits, the French and the Soviets. But since the 2008 election, the U.S. has made it a priority to do just that, partly as a result of war fatigue at home and partly because its defense priorities lay elsewhere. In the past few years, the Pentagon has opted to shift to developing operational strength against emerging threats, i.e. Russia and China.

Countering conventional threats from China and Russia gradually came to overshadow counterterrorism objectives in the Middle East. As the U.S. sought to delegate security responsibility to Middle Eastern nations, it fell into a credibility trap, caught as it was between maintaining influence in the region, preventing the formation of security vacuums and promising outright to withdraw. This has sucked the U.S. into maintaining – even increasing – militarized engagement in the Middle East over nearly two decades.

Washington has sought to implement low-cost strategies to create self-reliant actors that would tip the scales of the region’s balance of power and take on greater responsibility in countering transnational threats like Iran. This has led to partnerships with local militias such as the Kurdish peshmerga and the recruitment of European international allies, especially in the fight against the Islamic State. But even these low-cost strategies have begun to fetch a high price.

Once a power starts reducing its presence and operational capabilities, its remaining personnel become more vulnerable to attacks.

Increased threats to units, now smaller in size, have required deeper consideration to decide whether their presence is worth it and, if it is, at what point it is not. As the U.S. reckons with this in Syria and Iraq, Washington has begun to question the point of its 20-year-long Middle East doctrine.

Take Iran, for example. This past January, the U.S. and Iran very nearly confronted each other. Following tit-for-tat rocket strikes between U.S. coalition forces and Iran-backed Shiite proxies in Iraq, the U.S. assassinated Qassem Soleimani, the Islamic Revolutionary Guard Corps’ top commander, and Abu Mahdi Al Muhandis, the deputy commander of an Iraqi militia on Tehran’s payroll.

Iraq – already under the strain of monthslong protests against foreign influence and corruption – condemned the U.S. strikes as a violation of its national sovereignty and voted in parliament on Jan. 5 to request U.S. forces to leave the country.

On Jan. 9, Iraq’s caretaker prime minister requested the U.S. send an envoy to Baghdad to discuss conditions, but the U.S. refused to even entertain the prospect of withdrawal. To be sure, withdrawing from Iraq fits squarely into the U.S. national interest, but Washington did not want to appear to yield easily. To save face, the U.S. stayed put.

The coronavirus pandemic has therefore given the U.S. an out. In fact, it has already begun to withdraw its forces. Over the past two months, the U.S. military has handed over four bases to Iraq, even its most important one in the country at al-Qaim, located near the Syrian border.

Some U.S. personnel have been transferred outside Iraq to larger U.S. bases in Kuwait and Syria, some deployed home and some consolidated to U.S. bases in more secure locations in Irbil and Baghdad.

Iraq’s former caretaker Prime Minister, Mohammed Allawi, reported that during his brief tenure, U.S. embassy personnel communicated to Baghdad that the Pentagon was maintaining a quiet two-year withdrawal timeline, with plans to draw down the majority of American forces in Iraq by 2022.

Again, the pattern is clear: The U.S. draws down, its forces become more vulnerable and attacks continue, prompting further reductions and inciting more resentment. In Iraq, as the U.S. continued its withdrawals and personnel transfers, Iran-backed militias like the Popular Mobilization Forces and Kataib Hezbollah continued to carry out attacks on Camp Taji base and even the U.S.’ oil company Haliburton in Basra province.

The U.S. responded with retaliatory strikes on pro-Iran militia weapons storage facilities at an Iraqi army base in Babil province, an airport in Karbala, and PMF headquarters. The fact that the U.S. characterized its response as defensive fell on deaf ears in Baghdad, which grew increasingly angry with American barrages.

In Syria, the U.S. has already begun to prepare its partners for a life without Washington, especially as they shoulder more of the load for combatting the Islamic State. Posts in the northeast have started transferring missions and responsibility for certain operations to Kurdish partners.

The U.S State Department has sent delegations to meet eight Syrian Kurdish parties to encourage cross-party Kurdish unity and discuss the Kurds’ strategy in a postwar Syria, particularly when facing rivals – Russia, Turkey and the Assad regime – without U.S. ground support.

Just this week, U.S forces designed a new counterterrorism military unit that shifted responsibility to the majority-Kurdish People’s Protection Units, or YPG, in al-Tanf along the Syrian border with Jordan. The U.S. has increased its arms and financial contributions to Kurdish forces to strengthen their long-term viability as well, giving the YPG $200 million for ongoing counterterrorism operations.

The Levant’s New Geopolitics

Even more of a burden will be placed on other U.S. partners in the region – Saudi Arabia, Israel and Turkey – to mitigate a shared threat: Iran. U.S. allies may resent the U.S. for “leaving” the region but not so much that they will set aside their own differences with Tehran if it decides to fill the resultant security vacuum.

But a Levant devoid of American ground forces doesn’t necessarily translate to all-out conflict. Rather, it will transform into a buffer zone as its neighbors advance their defensive interests.

The Levant is enveloped by the region’s emerging powers: Turkey, Israel, Saudi Arabia and Iran. While religiously and ideologically poles apart, Turkey, Israel and Saudi Arabia had counted on the U.S. in their shared interest of disrupting Iran’s arc of influence across the Levant.

Absent U.S. boots on the ground, U.S. allies will look to the Levant as a strategic zone crucial to keep neutral. For Israel, this will mean controlling border regions with Lebanon and Syria to defend itself against Hezbollah, intensifying strikes on Hezbollah’s strategic locations and cracking down on Iran-affiliated groups in Israel such as Hamas and the Palestinian Islamic Jihad.

Saudi Arabia will try to boost its credibility in the Levant as the leader of Sunni Islam, increasing its support of Sunni factions in Iraq, Syria and Lebanon as a counterweight to Iranian Shiite influence.

Turkey, in particular, will feel compelled to further secure its eastern frontier, establishing zones of influence along its border with Iraq and Syria and advancing existing operations in Idlib and northeast Syria and Operation Claw in Iraq, to shield against Kurdish groups Ankara classifies as terrorists, Iranian proxies and part of the Russia-Syria alliance.

Turkey's Military Buildup in Idlib, February-March 2020

The prospect of an American disengagement sets up an interesting new reality in the greater Middle East. The U.S. will not withdraw entirely from the region, likely retaining its bases in the Gulf and maintaining air and naval superiority.

But on land, American dominance and its capacity to conduct ground operations will fade, to be replaced with economic instrumentalization and dependency on standoff air and naval strikes. The deficit of American influence in the region will spur a geopolitical reshuffle among Middle Eastern powers, solidifying alliances against regional rivals and reshaping the Levant into a strategic buffer zone.

Will Airbnb’s Implosion Trigger A Housing Bust?

by John Rubino

It seemed like such a good idea at the time.

Airbnbs were the next wave in hospitality, taking market share from hotels and motels and backed by a tech network that made running a virtual bed and breakfast fun and easy.

So you borrow a bunch of money, buy a couple of houses, and put them in the system.

At first it works.

Your properties fill up, your reviews are great, and your projected cash flow is twice what you would receive for a long-term rental. You — along with thousands of others — are thinking “real estate empire.”

Airbnb growth

Then out of nowhere comes a pandemic(!) and the sharing economy suddenly looks patently absurd.

Ride in other people’s cars?

No thank you.

Sleep in other people’s beds?


Airbnb bookings fall off a cliff, while Airbnb itself reports massive, potentially company-threatening losses.

Airbnb bookings

And just like that, your cash flow turns into cash burn. Big time.

Now what do you do?

You already have a house of your own so you can’t move into one of your rentals.

You borrowed to buy your properties so you have big monthly payments.

And even with the government’s mortgage forbearance program, you’ve got maintenance and taxes to cover, and little income with which to do it. 

You kind of have to sell, if not right now pretty soon.

But to whom?

See US pending home sales sank 20.8% in March.

Meanwhile, big price reductions are becoming the norm on Zillow.

The stuff you bought near the peak of the cycle may now be worth 20% less – if you’re lucky.

You, in short, are about to learn the definition of “illiquid.”

Another Housing Bust?

Now let’s dial the view back to the housing market as a whole.

As recently as February, a lot of regional markets had what realtors defined as shortages of homes for sale, which going forward provides a cushion against falling demand.

But that was with thousands of would-be Donald Trumps snapping up Airbnb-worthy rentals in hot markets.

Remove that future demand (because who in their right mind is buying Airbnb rentals today?) and add the new supply coming from people who have no choice but to sell, and the supply/demand calculus might change dramatically.

We’ll see.

Here’s what happened to prices in the last housing recession:

Case Shiller home prices Airbnb

Reading the COVID-19 Market

There is no telling whether equity markets are correct in defying the popular narrative about a coming Great Depression-scale downturn. Investors may be clinging to irrational hopes, or they may be betting that reports of the death of globalization have been greatly exaggerated.

Jim O'Neill

oneill78_BRYAN R. SMITHAFP via Getty Images_nysestockmarket

LONDON – Though I have spent nearly 40 years studying financial markets, I find them as bewildering, complex, and fascinating as ever.

At the time of this writing, the most widely watched equity index, the S&P 500, is trading at around 2,878, where it closed on April 27 (a Monday).

That was its highest close in six weeks, putting it less than 15% below its all-time high, reached just before the COVID-19 pandemic, and some 30% above its low in March.

This outcome seems to fly in the face of growing evidence suggesting that the US economy is headed for a contraction on a scale unseen since the Great Depression. Why is the US stock market (and many other markets) behaving this way? Are today’s market participants collectively smarter than the financial commentariat, as so often turns out to be the case?

Back in January, the COVID-19 outbreak was widely expected to produce a V-shaped recession (a sharp drop, followed by an equally sharp rebound) for most economies, because that is what happened in the case of SARS and other epidemics since the turn of the century. Four months later, it is certainly reasonable to ask if markets have been lulled into a state of irrational hope, finding comfort in the assumption that policymakers will continue to do “whatever it takes.”

While I am no longer consumed by day-in, day-out market-watching, I do occasionally check in on chart patterns, moving averages, and various technical analyses, such as those following the so-called Elliott Wave theory. Not surprisingly, the latest forecasts are all divided. Many share the gloom of most market analysts, and expect that the S&P 500 will drop to as low as 1,600, which would be consistent with a multi-month economic collapse.

Others, however, believe that we might be looking at a rally beyond 4,000 by early next year. That bullish projection anticipates not just a V-shaped recession but an upswing that is even more vigorous than the decline. Surely, such a strong market move would be impossible in the absence of a widely available COVID-19 vaccine, right?

Frankly, I have no idea how to answer such questions, and neither does anyone else (though some might pretend otherwise). Markets tend to move around to a staggering degree, propelled by extremes of maximum greed and maximum fear. The drop-off in mid-March may have reflected something close to maximum fear.

If so, it is possible that the current market has already discounted for the increasingly popular gloom narrative suggesting that there can be no V-shaped recession, only a deep-bottomed “U,” a stop-start “W,” or even a prolonged “L.”

After all, the most recent stock-market recovery has been led in large part by the tech sector.

Before the pandemic, many assumed that these companies were heading for a reckoning in the form of tighter regulation, antitrust actions, and so forth. But now, digital technologies and the companies that offer them have become more deeply embedded than ever, which suggests that there will be less political will for a post-pandemic crackdown on the industry.

Moreover, the countries that appear to be managing COVID-19 better than most have done so with the help of technology, and the rest of the world is now rushing to replicate their success.

The key is to deploy widespread testing, tracking, and contact tracing, all of which requires significant technological adaptation. The United Kingdom’s National Health Service will almost certainly emerge from the crisis as a vastly more technology-reliant organization than it was going into it.

By the same token, one should question the now-popular assumption that we are on the cusp of “de-globalization.”

If that is the case, why is every country looking beyond its borders for access to the most useful new technologies and methods of containing the pandemic?

Or consider the quest to develop a COVID-19 vaccine. We are witnessing one of the most remarkable episodes of international collaboration that the pharmaceutical sector has ever sustained.

To be sure, after the pandemic, many companies might be wary of depending wholly on any one country as the source of key inputs. But that doesn’t mean we are heading into a new era of autarky. If anything, companies will be looking even farther afield for ways to broaden, diversify, and reinforce their supply chains.1

As long as firms seek to satisfy consumers with the highest-quality products at the lowest possible prices, globalization will remain a fact of twenty-first-century economic life. Likewise, as long as people have an interest in seeing the world beyond their immediate community, international travel and tourism will continue to track per capita income growth.

Sure, the United States and the rest of the world may bungle the transition out of the lockdown phase, setting the stage for an extended period of political turmoil and social misery.

The S&P 500 may well plummet to 1,600.

Then again, it may well do nothing of the kind.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.